Introduction to Macroeconomics

Microeconomics

Macroeconomics

Definitions:Microeconomics: - the branch of economics that studies the

economy of consumers or households or individual firms

VS.

Macroeconomics: - The Study of the economy as a whole in contrast to microeconomics , which studies its parts.

Gross Domestic ProductGDP: The total value of all final goods and services produced by and economy in a given year.

- The most commonly used measure of a country’s output.

- GDP can be calculated in two different ways :* Expenditure approach - Add up the total that is spent on all

goods and services in one year.

* Income approach – Add up all income that is earned by the different factors of production (wages, rent, interest, profit)

- The GDP in each case should be the same.

Multiple-counting: Inflating the size of the GDP by including the value of the components of the final goods in the total.

Expenditure ApproachTo calculate the GDP using this approach, the final value of goods and services produced in Canada is tabulated by Statistics Canada through gathering expenditure information on a nationwide basis.

The formula below is used to arrive at the GDP:

GDP = C + G + I + (X – M)

Expenditure Approach Cont…GDP = C + G + I + (X – M)

C = Consumption: - What households spent on goods and services. - total spent on durable goods, semi-durable goods, non-

durable goods and services

G = Government Purchases': - contains value of expenditures on all goods and services

by all levels of Government. - Includes spending on wages to employees, office supplies, and public capital goods (schools hospitals)

Expenditure Approach Cont…I = Investment:

- A business’s purchase of capital goods, construction of new buildings, or changes to inventories, with a view to increasing production and profit.

(X – M) = the value of net exports in Canada

M = imports: - Purchases of all items , some of which are produced outside of Canada

X = Exports: - Production that originated in Canada but is purchased by Individuals, businesses and governments in other countries.

GNP and GDPGross National Product (GNP):

- Total value of all final goods and services produced by Canadian-owned factories or productions in Canada or anywhere in the world.

• Canada Started using GDP as its main measure of output because it gives a better indication of Canadian output.

- Includes production from Japanese – owned firms but excludes production from Canadian

Owned firms.

Comparing GDP Years• GDP is calculated based on

the market prices at the time the goods.

- Changes in the level of prices year to year can produce misleading results.

• If prices increase rapidly, the growth in GDP may not actually be a result of increased output.

• GDP is most commonly used as a tool for measuring economic growth of a Country.

Real GDP: the constant dollar GDP or chained dollar GDP.

• Economic Growth: - How much a country's economy has expanded from one year to the next.

Calculation

Real GDP (real GDP year 2 – real GDP year 1)__Growth rate = Real GDP year 1 x 100

Example: 1999 real GDP = $966.4 billion2000 real GDP = $ 1009.2 billion - Economy growing are rate of 4.4%

• Population size change can

be misleading if it change significantly.

- Dividing a Country’s GDP by its population reveals its per capita GDP.

• Does not count output that has no dollar value attached to it (renovating homes)

Drawbacks

• Does not include transactions without paper trails ( selling drugs)• Negative effects of

economic production. (water pollution, Solid waste)• distribution of

income

Measuring Employment: The Unemployment Rate

Unemployment Rate: - the percentage of the labor force not working at any given time. Statistics Canada calculates this figure once a month.

Process: - Conducting a nation wide survey - Population is then grouped into a number of categories.

1. Under age of 15 and/or institutionalized.2. eligible to be part of the workforce but chose not to participate3. Labor force

Labor Force: - The total of all Canadians holding jobs plus all those

actively seeking work.

Unemployment Rate

# Unemployed Unemployment Rate = Labour force X 100

Calculation

This definition gives rise to some criticism:

- Includes anyone who has any type of wage earning job as being employed. - Does not include workers who have been looking for jobs for so long that they may have just “given up”. If not actively looking they are not included as unemployed. - People who are “underemployed.”

The actual unemployment rate is really higher than the official figure suggests.

Criticism

Full EmploymentFull Employment:

- In Canada is considered by many to be when the unemployment rate is in the range of 6 to 7 percent. Also known as the natural rate of unemployment.

• High unemployment rate also entails the financial cost of programs, such as the Financial Insurance. This helps alleviate the problem of unemployment.

• Financial cost is compounded by lost taxation revenues due to lower incomes and decreased spending on goods and services.

• People suffer from a loss of self-esteem, los of job skill and increase in family tension.

• People living in Atlantic Canada and individuals with lower education levels consistently face higher levels of unemployment than the average Canadian. (Figure 9.6 and 9.7 in textbook)

Applying Okun’s LawUnemployment above the natural rate of unemployment has both financial and social costs:

Financial - lost output that results from labor resources that are sitting idle. Lost output is known as

GDP Gap.

GDP Gap:- Difference between the actual GDP produced by the economy and the potential GDP that could be produced if the unemployment rate was not higher than the natural rate.

Applying Okun’s Law Cont..

Okun’s Law: - for every percentage point that the actual

unemployment rate exceeds the natural rate, a GDP gap of 2% occurs.

Formula:

(unemployment rate – natural rate) X2GDP gap = actual X ----------------------------------------

GDP 100